After six weeks spent working in the field for a microfinance institute, (MFI), I have a clearer, more realistic image of the microfinance sector, at least within the Mexican territory. I felt that every day I learnt something new, because when I was not in the office with my colleagues, I was outside observing and trying to integrate with the people who could easily be a client of a MFI. But all in all, I learnt four important facts about the microfinance industry.
First of all, an MFI actually functions in a similar way to a bank, except that if an institute is not regulated like the one I worked for, it does not work with cash. Clients receive cheques when the loan is delivered to them and their payments are made in the form of deposits to the MFI’s bank account. As a result, there is no movement of cash in the branch offices. Moreover, because it is clearly a financial business there is a a lot paperwork that goes with microcredit.
There’ll be a contract, a commitment agreement, deposit receipts, weekly payment schedule, numerous Excel sheets and databases to check repayments and accredited loans week by week, client by client. For this, the headquarters operates in a similar way to the ordinary back office of a typical company.
Secondly, microfinance is a business. The clients treat it as such because they are ultimately looking for funding to improve their own businesses and a lot of the personnel behave accordingly, since there are procedures to follow when following up on the weekly repayments or trying to find new clients, as the engine of a MFI needs liquidity and for this a commercial spirit is endorsed by all.
Because loud alarm bells ring every time someone or a lending group does not pay in time, a lot of pressure is put on credit officers and their clients and there is a natural risk to concentrate solely on debt collection focused activities, which go against the original principles of microfinance, which include defending the poor from local moneylenders. Hence the humanitarian part of the work can easily be shelved.
Moreover, especially in the Mexican context, where microfinance is a developed and saturated market, there is a big need for innovation, to differ from the rest of the players in the sector. Every small town I visited in Mexico, whether it be Oaxaca, Fortín in Veracruz, or Milpa Alta, a rural area within the Federal District, will have at least five MFIs working locally and so the clients are getting used to having a choice and, more importantly, getting loans from multiple institutions which can easily lead to over-indebtedness.
There are numerous cases of microcredit borrowers getting a loan to pay off another loan, but an MFI, like the one I worked for, does not want to be part of a micro bubble and so has strict regulations and practises due diligence to make sure their clients don’t owe money to other financial institutions. In other words, an MFI should first and foremost differ from what a common commercial bank does wrong and secondly strive to grow a competitive advantage that allows one to stand out among their competitors. This can be done through the use of technology or implementing rigorous ethical and humanitarian conduct.
Lastly, many MFIs in Mexico claim that their biggest challenge is to recruit and train the right personnel. In a meeting of directors of MFIs it became evident that they all shared the problem of finding the right calibre of people, who have the combination of skills needed for microfinance and remain working in these institutes for an extended period of time. Especially amongst the MFIs that are not regularised, the operations tend to be small and costs are high and as a result the salaries are not comparable to commercial financial institutions.
There is a high turnover of staff and not much capacity to train or develop a human resource department that can work on staff retention. And yet, I was surprised to see many MFIs pushing themselves to train their office and local staff by organising regular workshops. When you come from the west, you tend to assume that all training should be done at school. Instead, working at this MFI made me realise that in a country like Mexico, many struggle to go to university and that even the majority of the middle class youth cannot finish university because of financial constraints.
In addition, the MFI directors argued that, even if their prospective staff were to obtain higher education, there is a lack of courses available that suit the microfinance sector, where there is need for a combination of hands-on financial skills, with strong sense of humanitarian mission. In fact, it was encouraging to hear some MFI representatives talk about a partnership agreement they are working on with a national university to give microfinance related courses which can then function as a plus for those who want to work in the sector afterwards.
All in all, this is the reality of a country where the capitalist market dominates the minds of the rich and the poor and, whether you are selling cactus or credit, a vibrant spirit of entrepreneurship is omnipresent. Within this context, it would be foolish to argue that the microfinance sector is not a commercial business and yet there are ways of running sensible businesses that help other excluded but sensible businessmen and women.
Especially after this field experience, which served as a reality check, I would like to reiterate strongly that microfinance is a powerful tool to support the micro entrepreneurs to make a living and grow within this capitalist mega structure that we live in.